Will Wall Street Control Our Water in the 21st Century?

Jim Olson is FLOW’s Founder and Legal Advisor

By Jim Olson

Headlines have flashed recently across news sites and social media covering Wall Street’s December 2020 launch of a water-futures commodities market for California or Colorado on the Chicago Mercantile Exchange. Meanwhile, Wall Street investment firm One Rock was purchasing global food giant Nestlé’s bottled and packaged water business in North America.

Both of these transactions signal a significant trend amidst a world water crisis and a serious danger to water as a human right and commons that has been considered public for over 1,500 years, raising the question: Will Wall Street and the Commodities Exchange own and control our water in the 21st century?

This is not the first time the financial and investment world have acquired or sought to control freshwater. The corporate acquisition of the rights to large volumes of water and control over the means to deliver them has haunted California and Western states for a long time. Well before investigator Jake Gittes probed the subterranean dealings of a Los Angeles water cartel in the acclaimed 1974 film “Chinatown,” a water war broke out in Colorado when East Coast water corporations set up privately financed and controlled water cooperatives to allocate and deliver water to farmers and ranchers. A populist revolt in Colorado in the late 1800s by settlers, farmers, and Jeffersonian purists put an end to the attempted takeover and chapter of Colorado history, culminating in a constitutional amendment that declared water was public and belonged to the people.

After the American Revolution, ownership of water passed from the Crown to the states as sovereign–meaning owned by the people. The title to navigable lakes and streams vested in the states absolutely when they joined the Union. Today, these common waters are protected by an ancient legal principle called the “public trust doctrine.” Under this doctrine, a state vested with this sovereign title to these n waters holds them in trust , charged with a solemn duty to protect these waters for generations in order  to safeguard the basic public rights of citizens, as beneficiaries of this trust, for  navigation, fishing, sustenance, drinking water, bathing, swimming, and other forms of water-dependent recreation. To assure the perpetuity of this trust, the doctrine prohibits the sale or disposition of these trust waters for private purposes or gain. (This was established in Illinois Central R Rd v Illinois).

Both of these transactions signal a significant trend amidst a world water crisis and a serious danger to water as a human right and commons that has been considered public for over 1,500 years, raising the question: Will Wall Street own and control our water in the 21st century?

The New Face of Privatization and Commodification Foretold

A familiar face of privatization over the past several decades has pitted residents and ratepayers of cities against global corporations like Veolia and Suez, threatening or taking over municipal public water supply systems, often with unaffordable increased rates and poorer service. One of the most widely known faces over the control of freshwater has galvanized citizens and communities to oppose bottled water giants like Nestlé, whose web of private or leased publicly owned wells and bottling facilities spreads to the four corners of the United States and into Canada.

But a new face has appeared with the recent announcement of the future commodities market proposed for California and One Rock’s acquisition of Nestlé Waters North American business. The water futures commodity markets will allow private investors to purchase contracts that bet on future scarcity and higher prices for water. And, Global water giants will continue to acquire control of municipal water systems, and Wall Street will look for more opportunities to acquire water sources and delivery systems like Nestle. Perhaps, most dangerous, investment firms like One Rock will look for ways to accumulate land and the right to use water to exploit those states or countries whose water law rules can be manipulated to extract and sever water from the land so it can be sold and delivered across continents and around the world.

The Shifting Gradient of Water Law

Beneath the surface of these faces of privatization and commodification lies a subtle, nearly indiscernible shift in the gradient of water law. This shift tips water away from the land and watersheds where it flows toward the diversion, sale, and delivery of billions of gallons of water as a product by any means or in any sized containers. This subtle shift in places, where the underlying water law of a state recognizes the transfer of a right to access on demand the allocation of a certain amount of water, makes it more likely water futures markets and Wall Street investors will pool money to create contracts or hedge funds to attract investors who have no interest in the water itself–the attraction is the price and profit that can be gained off speculation over the rising prices of scarce, freshwater.  The more certain the right to divert and sell or allocate a specific volume of water, the more likely the success of a water market or the investment in water-rich land or water sources.

For example, the reason the Chicago Mercantile Exchange can experiment with an investment contract in water as a commodity is because, as noted above, that under California and Colorado water law water rights in connection with land are based on the appropriation doctrine—first-in-time, first-in-right—that establishes a right to a specific amount or allocation of water based on use, and recognizes that the right to such water can be assigned or traded between the holders of those water rights. Put simply, the transaction is similar to the trade, transfer, or sale of one property for another or for cash, valued at the time by the demand and supply established by buyers and sellers. Typically, this involves the direct trading or selling of these water rights between farmers, cities, or other high-volume users. However, the trading of water can also occur between farmers, other landowners, and a bottled water company located elsewhere in a state, as has happened with Nestlé’s water operations in Salida, Colorado, over the past several years. Water commodity markets will look for states with well-established trading in law and policy.

East of the 100th Meridian, water law is based on some form of reasonable use, or similar rights of use, of water in connection with the overlying land. Generally, under reasonable use rules (which vary from state to state), the landowner may withdraw and use as much water as needed so long as the withdrawal and use does not unreasonably interfere with or harm the use of other adjacent or nearby landowners on a lake or stream or overlying a groundwater formation. However, unlike Western states, there is no right to a certain amount of water, and often there are qualified limitations on the diversion and use of the water on distant lands or in other watersheds.

Historically, as noted above, in Eastern water law states, the reasonable use of water in connection with land is unique to each situation. As noted above, there is no right to a fixed or certain quantity of water; therefore, the creation of a water commodities market becomes difficult, if not impossible. The amount of water in a watershed at any given point of time, the number of users, the demand of other users, the purpose and extent of the diversion of water, the needs of the stream or lake, along with other factors dictate how much water could be withdrawn for sale: Generally, under Eastern water law, the diversion of water out of a watershed for sale is qualified by the limitation that it cannot diminish the flow or level of a lake, stream, or a neighbor’s well. (This was established in Collens v New Canaan Water Company).

However, more recently some Eastern states have begun to erase or modify this limitation on the diversion of water for sale.  As a result, while the reasonable use doctrine may not provide a viable legal basis for a water commodities market, it may and does provide the owner of land with abundant water sources in some states the legal right to divert and sell water in containers as with  bottled water. In the past two decades, states through court decisions or their legislators have modified the common law of water use to include the right to separate the water from the land, and deliver and sell water to distant places without qualified limitations against diversion and sale that have protected, historically, the rights of other landowners and communities and the watersheds on which they depend for quality of life, jobs, and economy. This shift in the gradient of water law is reminiscent of the old adage that “water flows uphill to money.”

For example, in 2005, a Michigan appeals court side-stepped a 75-year-old rule that prohibited the diversion of groundwater off-tract for diversion to a distant municipal water utility, when it adopted a “reasonable use balancing test” to allow Nestlé’s to divert the water through its bottled water sales. (This case was Michigan Citizens for Water Conservation v Nestlé Waters). Similarly, as part of the adoption of a ban on diversion of waters from the Great Lakes Basin as part of the 2008 Great Lakes Compact (Great Lakes-St. Lawrence River Basin Water Resources Compact), the eight states agreed to a definition of “diversion” that carved out a “product” exception if the water is transferred outside the Basin and “intended for an intermediate or end use consumer”—think massive freight containers of water shipped on trains or giant ocean barges around the world. During this same time, Nestlé brought in a California water rights lawyer to  persuade legislators to adopt and manage a water allocation law system—in other words, the basis to move toward the transfer of allocated quantities of water—which would form the basis of a water market. Fortunately, a Michigan legislative committee rejected a shift to a western water allocation system, but in 2008 the legislature passed a groundwater withdrawal law that allowed for the withdrawal and sale of bottled water.

As the global and regional water crises and scarcity intensify, the pressure on states to change their underlying water law, that governs treasured sovereign water as a commons held for the benefit of citizens, to shift the rules of water law toward allocation or diversion and sale in favor of privatization and commodification.

This pressure threatens the conversion of our public water resources into more private control or a commodity through subtle changes in the law that increase the prospects of large private investors. It may happen directly, by changing the law to appropriative and transferable water rights like California; or, it may happen in the shadows of court decisions or unnoticed legislative changes, so that private landowners and corporations can control, capture, and sell as much water as they want up to the point that the harm is so substantial that someone finally stops it, such as the sale of billions gallons of water and a 10-year court battle that no citizen can afford to file in the first place (Michigan Citizens for Water Conservation v Nestlé Waters).
The point here is this: The privatization, commodification, or financialization of water may not be practical or even possible without favorable water laws and rules in a particular state. Except for water lawyers, land investors, judges, legislators, and thirsty water users like agricultural operations and sprawling cities, these shifts in water law beneath the feet of most citizens remain under the radar for most people.
States and their citizens are forewarned: Take action to reaffirm water is public and a commons protected by an overarching public trust, or they will wake up one day with notice in their mailbox or inbox that, in the future, for a fee, they will have to purchase a plastic water credit or debit card as a prerequisite for access to water.

As the global and regional water crises and scarcity intensify, the pressure on states to change their underlying water law, that governs treasured sovereign water as a commons held for the benefit of citizens, to shift the rules of water law toward allocation or diversion and sale in favor of privatization and commodification.

States Must Declare Water Public, Sovereign, and Held in Public Trust.

Unlike the localized battles over water in the Gilded Age, the war over water in the 21st century is both local and global, and calls for vigilance and strong declarations by states and citizens that uphold the paramount principle that water is public, and that it is understood by all that the rights to water of citizens, farmers, small businesses, landowners, and communities are paramount—above all else—against claims by corporations whose only aim is control over their balance sheets and profits from control of water sources and supplies and the speculation over water future prices in a worsening world water crisis.

In recent years, states and courts have begun to extend the public trust doctrine to smaller tributary streams and groundwater for the simple reason that the extraction of tributary water from a single hydrologic system will cause serious harm as much as if the pump diverted the water from a larger lake downstream (This case was National Audubon v Superior Court).

The public trust may be the only principle to protect citizens’ right to water without having to buy a water credit card for their next drink.

States and citizens can protect themselves and the state’s public water by passing laws or constitutional amendments that declare to the world that the waters of their state are above all else public and sovereign and held in public trust for all citizens of the state. Citizens at the local level can insist their local governments pass resolutions and ordinances that also declare water a human right and commons held in public trust. The Blue Communities Project has fostered a global movement by cities and towns to adopt resolutions to prevent the privatization and commodification of water, protect the right of access to water, and assure that water is first and foremost public and held and protected by public trust principles.

In doing so, a state will establish a shield against privatization of its public common waters. This does not mean a landowner cannot enjoy the reasonable use of water under the common law of the state. But it does mean that regardless of the common law right to use or sell water, it is limited by an overarching public trust that imposes a standard enforced by the state as trustee and citizens as legal beneficiaries.

The public trust imposes the standard that no private use or sale can impair the paramount rights of citizens to use and enjoy their water for navigation, sanitation and bathing, fishing, swimming, food and sustenance, and other needs where they live. At the same time, this sends a message to the rest of the world that a state’s water is a commons held in trust, and that those who seek to control and sell water as a private commodity, through hedge funds, water corporations, or other Wall Street investment schemes, do so at their own peril or with the realization that their investment is subordinate to the rights of citizens and communities to the water in their watershed.

The public trust may be the only principle to protect citizens’ right to water without having to buy a water credit card for their next drink.

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